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Corporate Income Tax burden swamps Individual Income tax burden for Low- and Middle-income families.

Most people can easily see the advantages of replacing the personal income tax and employee payroll taxes with a national sales tax like the FAIRtax:  no more income tax withholding and payroll tax deductions taken out of their paychecks, no more filing of annual tax returns, no need to hire a professional tax preparer, no more onerous record keeping, and so on.  The advantages of the FAIRtax also repealing corporate income taxes and employer payroll taxes, on the other hand, are not so obvious.  Some question the giving of a tax break to business.  After all, business should pay its fair share of taxes. 
 
The Office of Management and Budget reported that total federal revenues for 2014 were $3.021 trillion.  Of this amount:  individual income taxes were the single largest source of revenue at $1.395 trillion, or 46 percent of the total; payroll taxes were second at $1.023 trillion, or 34 percent of the total; and corporate income taxes were a distant third at $321 billion, or 11 percent of the total. The U.S. already imposes the highest corporate tax rate among developed countries (35%); yet corporate tax revenues generated amount to just 2 percent of GDP.
 


Corporations do not bear the burden of corporate taxes.  They merely remit them.  That is to say that they, in fact, function more as tax collectors rather than taxpayers.   Regarding who pays the tax, an instinctual reaction may be that the burden is borne by the shareholders in the form of lower after-tax rates of return on their investments in the corporation.  But that ignores that the burden may be shifted to consumers in the form of higher prices, to workers in the form of lower wages, or to non-corporate capital as capital moves out of the corporate sector because of the lower after-tax returns offered by corporations.
 
A Congressional Budget Office study (2006) found that workers bear slightly more than 70 percent of the burden of the corporate income tax.  How so?  Wages are significantly responsive to the level of corporate taxation.  The higher the corporate tax rate the greater the negative effect on wages.
 
The Organization for Economic Co-operation and Development (OECD) representing 34 member countries has also studied the effect of tax systems on economic growth and concluded:
 

“Corporate income taxes are the most harmful for growth as they discourage the activities of firms that are most important for growth:  investment in capital and productivity improvements.” 

 
Finally, a review of the economic literature published by the U.S. Treasury Department concluded:   “Studies suggest that labor may bear a substantial burden from the corporate income tax.” 
 


In fact, President Obama’s Treasury Department, while assuming labor bears a smaller burden of the corporate income tax than found in many research studies, nevertheless estimates that low- and middle-income families bear a greater tax burden from corporate income taxes than from individual income taxes.  For families with adjusted cash income in the bottom half of the income distribution, the corporate tax burden (measured by the average tax rate) swamps the individual income tax burden (also measured by average tax rate).  Not only does repealing the corporate tax make businesses more competitive in the global marketplace but it also benefits low to middle income families.

 
Karen Walby, PhD
Director of Research
FAIRtax



 

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